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This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...Just hours after DreamWorks Animation (NYSE: DWA) stunned critics with its first-quarter 2008 earnings report, equity analyst Wedbush Morgan changed its tune on the stock and began singing DreamWorks' praises.

Wedbush critiqued DreamWorks for "soft" box-office receipts and home-video sales. But the analyst believes that revenue from older movies in DreamWorks' library will help to shore up revenue streams in future quarters. Wedbush predicts that DreamWorks will generate at least $28 million per quarter in library revenue over the course of this year, a performance that would help push full-year revenues up past $660 million. That's quite a bold claim when you consider that, according to Reuters, the other dozen or so analysts following DreamWorks, on average, expect sales to come in at about $630 million.

So who's right here? Wedbush Morgan or, well, everybody else? For clues to Wedbush's stock-picking prowess, we turn once again to CAPS for a glimpse at the analyst's record.

Let's go to the tapeWhat we find there, unfortunately, bodes ill for DreamWorks investors. Far from being a shining star of the silver screen, Wedbush ranks in the bottom 20% of investors and has a record of calling not quite 43% of its picks right. Focusing on its active picks in the movies and entertainment realms, we find Wedbush lagging the market badly on such bullish picks as these:

But on balance, it's hard to feel confident in Wedbush's latest stock pick. The analyst's overall record looks just abysmal. Wedbush's main problem is that it falls prey to a pretty common failing among stock analysts -- it tries to play the "nice guy" and not hurt anyone's feelings by assigning "sell" ratings. Out of 98 active stock picks tracked in CAPS, Wedbush is bullish on 92.

But should you be?I think that's a bit lopsided. Everyone can't outperform the market average -- not this side of Lake Wobegon, at least. Otherwise, it wouldn't be an "average" at all. By limiting itself to making bullish calls almost exclusively, Wedbush practically guarantees that it's going to be wrong at least half the time -- and, as it turns out, it is, 57% of the time.

But not this timeAnd now, if I may turn on a dime and apparently contradict my Wedbush critique, let me tell you why the analyst is right this time, all its stats to the contrary notwithstanding. In a word, DreamWorks is "cheap." The stock sells for just 12 times trailing earnings, taking the most recent results into account, but analysts expect those earnings to grow at better than a 25% clip over the next five years. (The free cash flow picture is less bullish but similar: DW sells for 17 times trailing FCF.)

Although I'm sure DreamWorks deserves a slightly subpar valuation based on the inherent lumpiness of profits in the movie biz, no one deserves a 0.5 PEG ratio. At a price this low, buying DreamWorks is such an easy call to make, I think even Wedbush Morgan will manage to get it right.

DreamWorks Animation, Electronic Arts, and Netflix are all recommendations of Stock Advisor. Try out this market-beating newsletter service free for 30 days.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's ranked No. 1,026 out of more than 100,000 players. The Fool has a disclosure policy.

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As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.
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